Was bailing out Fannie and Freddie the right thing to do?

Okay, hear me out. I understand that if the U.S. government hadn’t stepped in and taken over Fannie Mae and Freddie Mac (I still can’t get over those names), then the mortgage giants would have exploded. Given that they back about half of America’s $12-trillion or so in home mortgages, that would be a very bad thing. But here’s the thing: By stepping in a bailing Fannie and Freddie out, the government didn’t solve the problem, they just diluted it.

Now, instead of the misery being concentrated among those folks who knowingly placed a bet on Fannie and Freddie — such as the bondholders who lent them money — the misery will be spread out among American taxpayers from coast to coast. Is that really fair? Should regular citizens who acted prudently and tried to avoid this mess by not investing in Fannie or Freddie, not loaning them money, and not taking on ridiculous mortgages of their own, now be forced to help bail out the people who did? Because that’s what this amounts to. The money’s going to have to come from somewhere.

I know some people will argue that if the government didn’t bail Fannie and Freddie out, then regular taxpayers would end up suffering anyway, as the economy tanked. But the truth is, without the bailout, the bondholders would have ended up shouldering more of the burden, and so they should.

I just worry that if bondholders and other investors get used to the idea that the government will bail them out when things get bad, then they’ll start taking on too much risk. And that wouldn’t be good. Because it leads to disasters like this.

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